SDRS Salient Features

The salient features of the Special Drawing Rights Scheme are as follows.

1. The creation of Special Drawing Rights (SDRs) is essentially similar to the concept of credit creation which central banks undertake in their countries to supplement the resources of the banking system to meet the monetary requirements – the liquidity needs of the country. The SDRs scheme is an extension of the same principle. In fact, basically the idea of SDRs is drawn from the popular Keynes plan of the creation of ICU and Bancor currency.

2. The scheme proposes that the allocation of SDRs is to be made on the basis of the quotas of IMF of the individual member countries.

3. SDRs have been created under a Special Drawing Account (SDA) with the IMF. The resources for the new account SDA, are created by an agreement amongst members as to the percentage of the existing resources (quotas) with the IMF to be formed into SDRs. At the Paris Conference on July 24, 1969, the Group of Ten, however, recommended that some $ 3,500 million worth of SDRs be created in the beginning year and $ 3,000 million in each of the two succeeding years.

4. With the introduction of SDR scheme, thus the accounts of the IMF are divided into (i) the general account and (ii)the special drawing account. The General Account deals with the ordinary transactions of the IMF relating to subscription towards quotas, drawings, repurchases, payment of charges etc. The SDA conducts the SDR transactions.

5. The scheme proposes that the Special Drawing Rights would be a sort of gold paper. Thus the value of the SDRs is fixed in gold. As per the existing scheme, the unit value of SDRs is expressed in terms of gold equal to 0,888671 gramof fine gold or one U.S dollar prior to August is 15,1971. With effect from February 13, 1973, and SDR is equivalent to $12. The value of SDR being fixed it has to the maintained by the member participants.

6. The scheme thus envisages pure fiduciary reserve creation. It provides for regularly creating SDRs in the IMF which the member countries would accept as reserves and could use of the settlement of international payments. The SDRshave been thus aptly described as paper gold. These paper gold reserves are expected to fill the gap of deficient in international liquidity resulting from a mere rise of 2.5% in world monetary reserves against the expansion in international trade at 8% per annum.

7. The SDRs themselves are not international money. SDRs are just like coupons which can be exchanged for currencies required by the holder of SDRs for making international payments further. SDR transactions are called out through entries into the SDA books of the IMF.

8. Under the new scheme the central banks of the member countries of the IMF will hold SDRs as their reserves along with gold and key currencies. However, the participants are required to provide their currency in exchange for theSDRs when called upon to do so, the purpose being that counties with stung balance of payments and substantial reserves would provide the requisite backing of real resources to the SDRs.

It has been statutorily laid down that due restraint would be exercised in the creation of SDRs in order to maintain people confidence in it.

9. The SDRs allocated to the Fund members are to be transferable assets under the designation issued by the IMF subject to certain limits of holding. Thus, it is obligatory on the part of the participating counties to accept drawing rights from fund members in exchange of an equal amount of convertible currency. This obligation, however, cannot exceed twice a country’s allocation.

10. Under the scheme, the use of SDRs would obviously impale a reduction in the reserves of the using country while the other participating counties which are receiving drawing rights in international settlements would accumulate their SDR holdings it is proposed that a modest rate of interest will be paid on SDR on holdings of such drawing rights.

11. The scheme provides that the decumulation and accumulation of SDRs would be taking place within the special drawing account itself. Over a five years period a country shall not use more than 70 per cent of its average net cumulative allocation.

12. Further, members using SDRs would incur an obligation to reconstitute their passion in accordance with the principle which is to take into account the amount and duration of its use. The provision of reconstitution is assumed to be very essential to enforce the ‘circularity’ of the SDRs.

Though the scheme seeks to reconditute the IMF and its international liquidity structure, it aims at increasing the international liquidity without causing any basic changes in the present IMF system and its functioning.